Dividends that do not qualify for lower capital gains tax rates are classified as what?

Dividends that do not qualify for the lower capital gains tax rates are classified as nonqualified dividends. This classification is important for tax purposes because nonqualified dividends are typically taxed at the individual's ordinary income tax rates, which are higher than the capital gains rates.

Nonqualified dividends primarily include dividends paid by certain foreign corporations, payments that are made out of certain deferred compensation plans, or dividends from stocks that have been held for a very short period of time. In contrast, qualified dividends are those paid by U.S. corporations or qualified foreign companies on stocks that have been held for a minimum period, and these dividends benefit from reduced tax rates.

Preferred dividends and retained earnings do not directly address the classification based on tax treatment, and while regular dividends may seem like a suitable answer, the specific term that captures those that do not meet the criteria for lower tax rates is indeed nonqualified dividends. This distinct classification is crucial for taxpayers in order to accurately compute their tax liabilities.